The economic analysis of civil litigation has focused on the action of thelitigants and on the effects of substantive and procedural rules on theirbehavior. This chapter focuses on the economic analysis of procedural rules andhow these rules alter the incentives of the litigants to file, settle and litigatedisputes. Such procedural rules affect the private costs and benefits of litigationthrough altering the net expected value and loss faced by the plaintiff anddefendant. Procedural rules also affect the social costs and benefits of litigationby affecting the both the direct and error costs of litigation. The analysis in thechapter is organized around the U.S. Federal Rules of Civil Procedure, and inreverse chronological order to reflect the economic analyses use of backwardsinduction to examine civil litigation. Topics examined in depth includesequencing rules, rules that affect the capitalization of litigation over parties andclaims, the rules of discovery, and juries.

The economic analysis of civil litigation, following upon the pioneering work of Landes (1971) , Gould (1973) , and Posner (1973) , has proven to be a fruitful area.Economic analyses of litigation have focused both upon the actions of partiesin civil litigation and upon the effects of substantive and procedural rules on thelitigants' behavior (see Cooter and Rubinfeld (1989) for a previous survey of thefield). This chapter focuses on the economic analysis of procedural rules. Papersin this field generally have examined the effects of procedural rules have on errorcosts and the direct costs of litigation. The length of the reference list annexedto this chapter indicates the extent of academic interest in studying the economiceffects of procedural rules, and the consequences of alterations to those rules.

The organizing framework for this chapter generally follows the U.S. FederalRules of Civil Procedure (FRCP). The FRCP, as supplemented by statutory anddecisional standards concerning the jurisdiction of courts and the preclusiveeffects of judgments, regulate most aspects of the civil litigation process, fromthe general statement of the purpose of the rules to the particularized standardsregarding process, pleadings, lawyer sanctions, discovery, the allocation of legalcosts, the relationship between multiple parties (including the regulation andcertification of class actions), motions, trials, and judgments. Since theirpromulgation in 1938, the FRCP have provided generally uniform rules for theconduct of litigation in the U.S. Federal courts, and similar rules have beenadopted in a majority of American states (for a comparison of federal and stateprocedural rules, see Oakley and Coon (1986) ). In addition, the Federal Ruleshave been frequently revised, and the process of rulemaking itself has becomea topic for economic and legal analysis. However, we do not discuss the rulesand related topics in numerical order. Rather, because the economic analysis oflitigation must be forward looking, and thus proceed using backwards induction,our chapter is organized in reverse chronological order.

Topics reviewed in depth in this chapter include sequencing rules, rules thataffect the capitalization of litigation over parties and claims, the rules ofdiscovery, and juries. Related areas not addressed in detail in this chapter aretreated in other sections of this volume. These areas include: other areas of civilprocedure, including fee shifting [7300], the litigation/settlement decision [7400],and class actions [7600]; the organization of the courts, including jurisdictionalissues [7100-7200]; criminal procedure [7700]; the economics of crime andpunishment [8000-8600]; arbitration and the private enforcement of law [7500];bankruptcy proceedings [7800]; legal error, rules versus standards, and accuracyin adjudication [790], punitive damages [3700], the computing of damages,including the allocations of damages via contribution and indemnity rules [3500];and the production of legal rules and precedent [9000-9900]. In addition, issuesrelating to evidence and information in litigation, including the rules ofdiscovery, attorney client privilege, and advice for litigation, are examined in acompanion section on evidence [7900].

Economic analyses of procedural rules generally have proceeded within Posner's(1973) framework, which conceives the purpose of such rules to be theminimization of the sum of error costs and direct costs. See also Tullock (1975) and Posner (1992) for a general analysis of procedure. Consistent with thisframework, Rule 1 of the FRCP directs that the rules be construed andadministered to secure the just, speedy, and inexpensive determination of everyaction. Economic analyses of procedural rules focus on the effect such ruleshave on the incentives of potential and actual litigants. Thus, the economicanalysis of procedural rules must begin with an economic model of litigation.

The basic economic model of litigation has two parties, a plaintiff (p) that has apotential claim against the defendant (d). The plaintiff's estimate of the netexpected value ( NEV ) of the claim equals his estimate of the probability ( P ) thathe or she will prevail ( P p ) multiplied by the expected award ( D p ), net of themarginal costs to the plaintiff of proceeding to the next stage of litigation ( C p ).The defendant's objective function for estimating expected loss ( EL ) isdeveloped in parallel fashion, as equaling the defendant's estimate of theprobability the plaintiff will prevail ( P d ) times the expected award ( D d ) plus thedefendant's marginal costs of proceeding to the next stage of litigation ( C d ).

In the more developed models, several of the variables may be endogenouslydetermined. For example, both litigants' selections of C may affect their estimatesof the outcome, and one litigant's choice of C may affect the other litigant'sestimate of its own cost of proceeding to the next stage. Most analyses usesequencing models, for which the definition of marginal cost given in the text isthe most general case. In the most basic models, this cost is conceptualized asthe marginal cost of 'trial' over 'settlement,' though obviously it can begeneralized to any of the multiple stages of litigation, and can refer tocooperative, decisional, or unilateral withdrawal outcomes, as developed by Cornell (1990) . In processes without discrete formal stages, such as theAmerican discovery process and some Continental trial processes, the mostgeneral case will be continuous updating of NEV and EL as each new item ofinformation (e.g., each witness or investigation) becomes available.

In addition, the litigants can be influenced by effects external to the currentlitigation--for example, by the precedential or preclusive effects of the judgmentin the current litigation on future litigation. In such cases, a current plaintiff'sjudgment will produce an external gain to the plaintiff ( G p ) while the defendantwill suffer external loss ( L d ). Likewise, a defendant's judgment will produceexternal gain ( G d ) while the plaintiff will suffer an external loss ( L p ).

The NEV and EL are the primary determinants of the incentives given tolitigants in the economic model, including the amount of effort expended duringlitigation, the trial/settlement decision, the decision to file a suit, and thedecision to avoid behavior that would give rise to legal liability. Becauseprocedural rules alter the NEV and EL , these rules will have a central role indetermining litigation incentives and outcomes. Because decisions made atearlier stages of litigation are dependent upon the parties' expectations of theoutcomes (and their own and opposing parties' decisions) during later stages ofthe litigation, economic analysis begins from the last stage of trial and judgment,and proceeds by backward induction. Thus, we list and discuss topics in reversechronological order.

The last stage of a civil litigation in the court of first instance is the trial andjudgment ( Cooter and Rubinfeld (1990) ). This discussion suppresses thepossibility of appellate review, which in the U.S. federal system is governed bya separate set of Federal Rules of Appellate Procedure. Appellate review in theUnited States is concerned primarily with the correction of legal error andsecondarily with factual error. For a discussion of the economic analysis ofthose topics, see section [790] in this volume.

Trials and judgments are governed by Sections VI and VII of the FRCP (Rules38-63). Subject to certain motions for the court to set aside the verdict (Rule 50)or order a new trial (Rule 59), judgment is entered as given by the factualfindings and legal conclusions of a judge (see Rule 52) or the verdict of a jury(Rule 58). The federal rules allow any party to demand a trial by jury of any issuetriable as a matter of federal constitutional right by a jury (Rule 38). Althoughmost American states also provide by state law or constitution for a right to trialby jury in some or all cases, the state courts generally are not bound by thefederal constitutional right to jury trial, except in certain cases where they areadjudicating federal claims for which federal law requires a right to jury trial. Rule39 allows the parties in these cases also to have a trial by the court, by jointconsent. Gay, Grace, Kale and Noe (1989) examine the choice between judge andjury under the assumption that juries are 'noisier' adjudicators than judges. Clermont and Eisenberg (1992) examine empirically whether the choice of judgeversus jury produces differing verdicts in product liability cases tried under statelaw, finding that--contrary to the popular belief--judges, not juries, are moregenerous to plaintiffs. Further, they do not find that these results are explainedby selection bias.

In addition to explicit choices by the parties, several of the Rules allow thejudge to exercise certain powers even when the case is tried by jury. Rule 49allows the court to require a jury to return a special verdict, which involvesexplicit findings upon each of several elements of the claim at issue rather thanallowing the jury to return the more common general verdict (see Lombadero(1996) , James, et al., (1992) at 377). Rule 50 provides for judgment as a matter oflaw, which can be used by the judge to preempt or overrule a jury upon thedetermination that, after being fully heard, there is no legally sufficient basis fora reasonable jury to find for a party on an issue (see McLauchlan (1973) ). Rule56 provides for an equivalent ruling in the pretrial stage by summary judgment,on the basis of pretrial discovery material and written submissions by the parties(see McLauchlan (1977) ), and Rule 12 permits a judgment as a matter of law atthe earlier pleading stage, in cases where the plaintiff's claim is legally deficienton its face.

The Rules also regulate the size and decision rule used by civil juries, as well asthe process through which jurors are selected. Rule 48 specifies that, unless theparties otherwise stipulate, a civil jury shall be not fewer than six nor more thantwelve, and that the verdict shall be unanimous. Economic analyses of jurydecision-making include an examination of how juries process information( Klevorick, Rothschild, and Winship (1984) , Froeb and Kobayashi (1996) ), andthe effect of jury size and alternative decision rules ( Klevorick and Rothschild(1979) ). Finally, Rule 47 (as supplemented by federal statutes) controls theselection of jurors, including the procedures for examination of jurors during theselection process, and the use of peremptory challenges (see, e.g., Schwartz andSchwartz (1996) ).

A separate literature has bypassed explicit consideration of the jury versusjudge decision-making process by modeling the outcome of a trial as beingdetermined by the litigants' expenditures on litigation. The most common modelof litigation expenditures is where the both litigants expend resources to alter theprobability of prevailing. (see Posner (1973) , Goodman (1978) , Tullock (1980) , Wittman (1988) , Katz (1988) , Hay (1995) , Kobayashi and Lott (1996) . That is, inthese models, the marginal cost of future litigation stages C p and C d , (usuallyconceptualized as 'trial versus settlement') are endogenous choice variables thatdetermine the probability that the plaintiff will prevail P(C p ,C d ). The equilibriumamounts of litigation expenditures depend upon the relative stakes of the parties,and upon the relative merits of the case. The litigation expenditures andprobability determined by solving for the Nash equilibria are used as theexpected values for earlier stages of litigation. Other articles have examined therelationship between the burden of evidence or decision standard and litigationexpenditures. In these models, litigation expenditures that allow a litigant to meetthe burden of proof or decision standard serve as a costly signal of liability (see,e.g., Rubinfeld and Sappington (1987) ).

The major decision preceding commencement of a trial is the decision whetherto settle the case or proceed to trial. The relative magnitudes of plaintiff's NEV and the defendant's EL are the primary determinants of whether a case settles orwhether trial occurs. As noted above, this modeling can be generalized to anystage preceding a decision by the court, or a further commitment to incurlitigation expense. Under risk neutrality, the NEV sets the plaintiff's minimumacceptable settlement offer and the EL the defendant's maximum settlement bid.In the absence of lawyer-client agency costs, a sufficient (but not necessary)condition for litigation is the perceived absence of a bargaining range, whichoccurs when the plaintiff's minimum acceptable offer is greater than thedefendant' maximum bid, i.e., NEV > EL , or equivalently:

The above condition identifies two reasons why parties choose to foregosettlement and proceed to trial. The first is based on prediction failure. Thesecond is based on consideration of external effects, specifically precedential orpreclusive effects of the current litigation on future litigation.

Under the simplifying assumptions that the litigants have symmetric stakes ( D p = D d = D ) and that there are no external effects ( L d = L p = G d = G p = 0 ), thecondition for trial rather than settlement reduces to the following expression:

(P p - P d )D > C p + C d (2)

This condition illustrates the optimism model of litigation. In such a model,settlement fails to occur because of prediction failure -- that is, settlement failsbecause the parties have mutually inconsistent and relatively optimisticestimates of the probability that the plaintiff will prevail (i.e., P p > P d ). Thelitigants' erroneous predictions lead them to behave as if there were no room fora mutually beneficial settlement.

Economists also have modeled the process through which such mutuallyinconsistent and optimistic predictions are generated. The Priest and Klein(1984) model of case selection is based on the optimism model, and has twomajor hypotheses. The first and more general hypothesis is that the casesselected for trial are not representative of the population of disputes.Specifically, under the assumptions of symmetric stakes and specificdistributional assumptions about the litigants' estimates of P (specifically thateach litigant's estimate of P is an independent draw from a unimodal distributioncentered around the true P ), the basic Priest-Klein model predicts that adisproportionate number of cases selected for trial will come from cases that areclose to the decision standard. The second hypothesis is a specific predictionfor observed case outcomes in the limiting case where the litigants accuratelyestimate P . Priest and Klein show that under these circumstances thedistribution of filed cases around the decision standard becomes approximatelysymmetric, and the generated plaintiff win rate approximately equals fiftypercent.

Because the prediction failure model predicts settlement failure because litigantslack information at the time of the final trial/settlement decision, it suggestsprocedural reforms aimed at increasing pre-trial information. The management ofpre-trial information is addressed in Section V of the FRCP (Rules 26-37). Theprimary rule is Rule 26, which contains the general provisions governing civildiscovery. Under Rule 26, litigants are required to respond to requests forinformation by the adverse party, on the theory that such requests andresponses would increase pre-trial information and increase settlement andaccuracy in adjudication. However, economic models of discovery have pointedout several problems with the rules. First, the rules shift the costs of gatheringinformation from the requesting to the responding party, and thereby introduceboth a potential moral-hazard problem and strategic behavior into the demandfor pretrial discovery. Because the costs of responding to a discovery requestare, in many cases, larger that the cost of making a request, this externalizationpredicts that parties will request information well past the point where themarginal value of information outweighs the marginal costs of gathering theinformation. In addition, the process of discovery can decrease, rather thanincrease, settlement by making parties more optimistic (see Cooter and Rubinfeld(1994) ). Finally, discovery can potentially decrease the amount of information inlitigation by providing disincentives for the production and retention ofinformation that might be subject to extensive legal discovery (see Kobayashi,Parker and Ribstein (1996) ). See also Hay (1994) and Sobel (1989) .

The perceived problems of 'overdiscovery' predicted by the economic model oflitigation have been addressed in several amendments to the discovery rules. In1983, Rule 26(b) was amended to embody an explicit cost-benefit test that couldbe applied by the judge to limit discovery. At that same time FRCP 16 wasamended to expand the judge's power to manage the pretrial process in general.However, the economic model suggests that these managerial solutions may beinferior to forcing each litigant to internalize the costs of its own informationrequests, or at least to pay for the marginal cost of extensive discovery requests( Cooter and Rubinfeld (1994) ).

In 1993, Rule 26 was further amended, again in response to concernsregarding litigants' overinvestment in discovery activity. However, the majorchange to the rules was to institute a regime of initial disclosures to be madewithout any request for information from the adverse party (see FRCP Rule 26a, Brazil (1978) , Schwarzer (1989) , Cooter and Rubinfeld (1995) ). Applying theeconomic model, this change is likely to make matters worse. To the extent thatcost-shifting is the source of 'discovery abuse,' these rules exacerbate theproblem by allowing the requesting party to externalize the costs of bothrequesting and responding to requests for information. This effect is magnifiedby abandonment of code pleading in favor of the broad notice pleading rulescontained in the FRCP (Section III, Rules 7-15), (see Epstein (1973a, 1973b, 1974, 1986, Posner (1973) , Katz (1990) , Bone (1997) ). Further, to the extent that this rulemoves the costs of pretrial discovery into an earlier phase of the litigation, thismay have the effect of increasing total costs, and decreasing the marginal costsof trial over settlement. The 1993 amendment was subject to a local option in U.S.federal districts, which has reduced some of the effects of the rule change.Empirical analysis has shown that the busiest federal districts have opted out ofthe new rule. ( Kobayashi, et. al. (1996) ).

To illustrate this point, consider the case with symmetric stakes and wherethe litigants agree on the probability the plaintiff will prevail, i.e., P p = P d = P. According to the simple optimism model, such a case will settle in order to savethe costs of a trial. However, even under these assumptions, litigation may begenerated if the current case has implications for future behavior of the litigantsinvolved. The NEV of the lawsuit to the plaintiff equals P(D +G p ) - (1-P)L p - C p , and the defendant's EL = P(D+L d ) - (1-P)G d + C d . The condition for litigation NEV > EL becomes:

P(G p - L d ) + (1-P)(G d - L p ) > C d + C p (3)

Condition (3) shows that, even when the prospective outcome of a trial isagreed upon by the parties, trials can be generated when the external gains tothe winning litigant outweigh the external losses to the losing litigant. Incontrast to the sources of trial in the prediction failure and settlement failuremodels (where information costs prevent litigants from achieving a settlementwithin an existing bargaining range), external effects cause trials by preventingthe existence of a bargaining range due to asymmetries in external effects.Because no mutually beneficial bargain is foregone, these trials are not a failure.In fact, the existence of external effects focuses on the positive and valuablerulemaking function of trials.

The model of trial based on external effects also suggests the relevance of adifferent set of procedural rules - one that focuses on the effects of litigation onfuture claims and third parties. The FRCP addresses the packaging of claims andparties generally in Rules 13-14 and 17-25. These Rules serve as inclusivepackaging devices, which operate by giving litigants incentives andopportunities to join parties and claims in order to internalize external effects andto achieve economies of scale in litigation. These Rules include the permissivejoinder rules (Rule 18-20), impleader (Rule 14), interpleader (Rule 22), intervention(Rule 24), the rule governing counterclaims (Rule 13), and the rule governingclass actions (Rule 23). For an economic analysis of counterclaims, see Landes(1994) . For a discussion of various aspects of class actions, see Bernstein (1978) , Dam (1975) , Rosenefeld (1976) , Friedman (1996) , and Section [7600] of thisvolume.

A second major category of packaging rules include the common law rules ofprecedent, or stare decisis, and the rules of preclusion, or the law of res judicata.The common law rules of res judicata include the doctrines of claim preclusion(also known as merger and bar) and issue preclusion (also known as collateralestoppel). Under the rule of claim preclusion, parties or their privies (i.e.,predecessors or successors in interest) are precluded from relitigating issuesthat were or could have been raised in the first action (see , e.g., Kobayashi(1996) , Landes and Posner (1994) ). Claim preclusion prevents the splitting ofclaims based on the same out-of-court transaction, thus functioning asmandatory joinder-of-claims rules by their prospective effect on future litigation.In contrast, issue preclusion (collateral estoppel) is limited to issues that wereactually litigated, actually decided, and necessary to the judgment to in the firstcase. In addition, while application of claim preclusion is generally limitedsymmetrically to persons who were either parties or successors to parties onboth sides of the initial litigation, collateral estoppel can operatenon-symmetrically, or, as it is termed in legal doctrine, non-mutually, in the sensethat collateral estoppel can operate in favor of strangers to the first action, butcan operate against only parties or their successors. (See Spurr (1991) , Hay(1993) ). The existence of non-party preclusion has led to the attempted use ofsettlement conditioned on vacatur (the eradication of a prior public decision) asa means to eliminate the effect of preclusion. See Fisch (1991) .

To see the effect of the application of non-mutual collateral estoppel, considerthe case where a single defendant faces two different plaintiffs sequentially.Suppose for simplicity that both cases turn on a single issue that determines theoutcome. First consider offensive collateral estoppel. If the first plaintiff prevailsagainst the defendant, the defendant is precluded from relitigating the decisiveissue against the second plaintiff. Thus, a loss in the first case results in the lossof both cases, and the external effect L d = (1-P)D . In contrast, a win by thedefendant against the first plaintiff does not preclude the second plaintiff fromrelitigating the issue, if the second plaintiff is neither a party nor a privy to thefirst action. Thus, the only effect on the second litigation would be theprecedential gain G d = dP D ), where dP equals the change in P in the secondlitigation. If there are no novel issues of law, this gain is likely to be close tozero. And under the assumption that the plaintiffs are not repeat litigants, L p =G p = 0 .

Substituting into the condition for litigation (equation (3)) yields:

(1-P)D(dP - P) > C d + C p (4)

If the precedential change dP is close to zero, condition (4) is unlikely to besatisfied. Thus, there will be little incentive to take such cases to trial. Thisincentive for settlement has led some to object to offensive non-mutual collateralestoppel on the grounds that such a rule will allow plaintiffs to repeatedly extractlarge settlements from a common defendant. However, the total effect onsettlement amounts from such a rule is unclear (see Hay (1993) ). First, the effectof estoppel causes the repeat litigant to capitalize all future litigation into the firstlitigation. This increase in the stakes causes the repeat litigant to spend a largeramount of resources when he goes to trial. This has the effect of lowering P ,thus moving the bottom of the bargaining range downward. Further, the repeatlitigant is likely to take a harder bargaining stance in the first litigation byanticipating its effects on future litigation.

In contrast to the rule of offensive non-mutual collateral estoppel withmultiple plaintiffs, such a rule increases the likelihood of litigation. In addition,use of such a rule would apply preclusion against a non-party that wasrepresented by a party in the first litigation with low relative stakes, which mayincrease legal error and increase the amount of litigation (see Spurr (1991) ). Thus,the Court's rejection of the latter rule because of due process concerns isconsistent with the predictions of economic analysis.

The existence of asymmetric information in litigation again points to thediscovery rules (see the discussion in part b, supra). In addition, economistshave examined procedural rules that would increase the incentives forsettlement. Under FRCP Rule 68, the defendant can make an offer of judgment.If this offer is not accepted by the plaintiff, and the subsequent judgment is lessfavorable to the plaintiff, the plaintiff is responsible for the defendant's costsafter making the offer (see Anderson (1994) , Anderson and Rowe (1996) , Miller(1986) , Chung (1996) ). However, liberal and early use of Rule 68 is limited by therequirement that the defendant offer not merely settlement but judgment, whichcan have a preclusive effect in subsequent litigation. Further, under the currentRules, it does not allow the plaintiff to recover marginal fees (although manystatutes provide for one way fee recovery by plaintiffs). In addition, economistshave analyzed contractual settlement devices such as settlement escrows (see.,e.g., Gertner and Miller (1995) ), and the use of mediation and arbitrationtechniques (see Shavell (1995) ).

Perhaps the one of the most salient features of the FRCP, and one that has beenonly recently addressed by the economics literature, is the effect of the rules onthe timing and sequencing of litigation. While many economic models treatlitigation as a timeless decision, the procedural rules lay out a sequence ofevents that determine how litigation will proceed over time. The timing andsequence of litigation has been shown to have important implications for the NEV of a lawsuit and the behavior of litigants.

For example, the ability of litigants to sequentially litigate motions or toseparate liability and damage phases of trials have been shown to affect both thecost of litigation and the value of the litigation if litigants are allowed to exit.Sequencing with easy exit increases the 'option' value of litigation by allowingplaintiffs to avoid conditional negative NEV outcomes by exiting the litigation.(See Cornell (1990) , Landes (1993) , Chen, et al. (1997) ). In addition, the ability totake motions sequentially can affect the credibility of negative expected valuesuits (Bebchuk 1996) .

Under the FRCP, exit is controlled by Rule 41. Under Rule 41, the plaintiff canunilaterally dismiss an action without order of the court at any time before theadverse party answers. After this, dismissal requires mutual stipulation by allparties, or an order of the court. The application of Rule 41 is a prime example ofthe tension between the ex-ante and ex-post effects of procedural rules. Ex-post,it is unlikely that a defendant will prevent a plaintiff from abandoning a claim.However, the willingness of the court or the adverse party to allow the plaintiffto easily exit the litigation may be the primary reason the suit was filed in the firstplace.

The FRCP address this inability to commit through Rule 11, which allows thecourt to impose sanctions on parties and their attorneys for filing frivolous suits.This rule addresses the commitment problem by allowing the motion forsanctions to survive the dismissal or mooting or the original claim. Thus, Rule11 allows the motion for sanction to survive as separate action with thesanctions as the incentive to litigate. Economic analyses of sanctions under Rule11 include Bebchuk and Chang (1996) , Polinsky and Rubinfeld (1993) , Bone(1997) , and Kobayashi and Parker (1993) .

However, recent amendments to Rule 11 may have reduced the value of Rule11 as a commitment device. In the 1993 Amendments to the FRCP, the rules wereamended to allow the a litigant twenty-one days to withdraw his pleading uponbeing served with a Rule 11 motion by the adverse litigant. In essence, the newrules allows for free exit, and thus weaken the commitment and deterrent effectof the rules. While the amendments to Rule 11 were designed in large part todecrease the volume of 'satellite' litigation over alleged Rule 11 violations, theeffect of the rule change may be to increase the number of filed cases, the rateof Rule 11 challenges, and total litigation costs (Kobayashi and Parker (1993)) .

Economists have also examined the use of two-way fee shifting (often referredto in America as the 'English' rule, in contrast with the general 'American' rulethat each party bears its own fees, regardless of outcome) to deter low ornegative value lawsuits. Because two-way fee shifting imposes extra costs onthe losing party, it disproportionately affects low probability lawsuits (see Shavell (1982) ). However, the FRCP has not incorporated two way shifting offees and costs, and state experiments have not proven successful or long lived(see Snyder and Hughes (1990) , Hughes and Snyder (1995) ). In addition, almostall fee shifting statutes require the imposition of a judgment. Thus, the use of feeshifting would not necessarily reduce the option value of litigation. That is, ifexit is routinely allowed prior to judgment, fee shifting will not serve as adeterrent. Indeed, to the extent that two way fee shifting would increase thevariance in final outcomes, use of such a system would increase the option valueof litigation, and thereby increase the supply of filed cases (Cornell (1990)) . Fora more complete discussion of fee shifting, see Section [7300] of this volume. Seealso, Katz (1987) , Plott (1987) , Spier (1994) , Reinganum and Wilde (1986) , Bowles(1987) , Braeutigam, et al. (1984) , Dewees et al. (1981) , Donohue (1991) , Graville(1993) , and Katz and Beckner (1995) .

Finally, both the process of procedural rulemaking and the adversarial systemitself have been the subject of economic analyses. Indeed, the controversy overthe relative merits of party-controlled adversarial presentation and a more'managerial' system of litigation was at the heart of the controversial amendmentsto the discovery rules, and has been the subject of debate in the academicliterature (see Tullock (1980 , 1988) , Langbein (1985) , McChesney (1979)) . For arecent report of experimental results, see Block, et. al. (1996) . For a public choicetreatment of the common law of procedural rules, see Macey (1994) .

The controversy over the recent amendments to Rule 11 and 26a have drawnattention to the process through which the rules are revised (see Kobayashi andParker (1993) , Kobayashi, et al. (1996)) , and have highlighted the lack of empiricalevidence on the performance of procedural rules and systems (see, e.g., Walker(1994) , Galanter (1983) ). Indeed, the amendment to Rule 26a, which allowsindividual district courts to opt-out of the discovery rules, the Civil JusticeReform Act of 1990, which encouraged local variations in each district, andvariation in local Federal Court rules and state court rules all provide substantialchallenges to the traditional centralized system of rulemaking that existed in thefederal system prior to 1990 (see Kobayashi, et al. (1996) , Solimine and Pacheco(1997) , and Subrin (1989) ).